Australian-based point of sale lender Sezzle, with offices in Minnesota and aspirations for the U.S. market, saw their lending license rejected. Instead of diverting credit card transactions through its small loan operation, the unlicensed lender must now reconsider its business strategy.

Following the decision, Sezzle stock plummeted.  The encouraging public offering, which “raised $40 million in an IPO” on the Australian Stock Exchange, fell 40%, as reported by the New York Times. The California Department of Business Oversight (DBO) denied a lending license to point-of-sale lender Sezzle “after determining the Minnesota-based fintech company had engaged in illegal unlicensed lending in the state.”

In a 10 page decision, DBO pointed to four important issues.

• Sezzle has not previously applied for a license to lend in California because Sezzle does not consider its financing product a loan.
• Rather, Sezzle contends that “[w]ith respect to California consumers, Sezzle purchases credit sale contracts from merchants who sell goods to consumers.” 
• Sezzle further contends that it’s purchases of credit sale contracts do not constitute loans under California law and, thus, are not subject to the CFL.
• The Commissioner disagrees and seeks to deny Sezzle’s Application due to Sezzle’s making of loans to Californians without a license.

Because a loan is a loan, a fintech may not redefine the standards.

• It is a violation of the CFL to “engage in the business of a finance lender . . . without obtaining a license from the commissioner.”  (Id., § 22100, subd. (a).)
•  A finance lender “includes any person who is engaged in the business of making consumer loans . . . .”  (Id., § 22009.)
• A consumer loan “means a loan . . . the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes.”  (Id., § 22203.)
•  Put simply, a loan is a “grant of something for temporary use,” and the business of lending money is the business of providing temporary use of money.

Banking has overhead, liquidity standards, and reporting requirements.  It is not fun,  but everything plays into two principles: Safety and Soundness.  Pity the lender that does not comply.

The New York Times reports:

• The company’s troubles are latest in a line of problems  buy-now-pay-later (BNPL) firms have been facing.
• Companies like Sezzle, which give young shoppers easy credit to spend online, have gained popularity, but their mode of operation attracts scrutiny, with regulators arguing whether such credit should be treated as a bank loan.
• In Australia, regulators have questioned the business model and accused Afterpay – considered an industry bellwether – of non-compliance with money-laundering laws.
• The country’s central bank is also scheduled to review the payments industry this year.
• Afterpay, however, said in a statement that it received the California lending license six weeks back, sending its shares up 4.6%. It did not specify what it did differently to get it.

As we said in a recent Mercator Advisory Group Viewpoint, “Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You.”  Fintech may be exciting, but lenders still need compliance guardrails to stay out of trouble.

Overview by Brian Riley, director, Credit Advisory Service at Mercator Advisory Group